Conventional Loans vs. Jumbo Mortgage Loans

Getting a mortgage for $417,000 or less isn’t much of a problem these days, provided you’ve got at least a 620 credit score, enough income to pay your loan note, taxes and insurance, set aside some cash reserves, and you’re willing to go through all of the paperwork that lenders now require.

But getting a jumbo mortgage for anything above the conventional amount is tougher and requires even more paperwork.

In 2007, if you were looking for a $600,000 loan, all you’d need was a decent credit score, 5 percent down in cash and a willingness, in some cases, to pay a slightly higher interest rate, maybe a quarter of a point more than the going conventional loan.

Fast forward to today: For any sort of a jumbo loan, in many cases you’ll need to put down at least 25 percent in cash and have 2 months to 6 months worth of cash reserves, a credit score that’s in the mid-to-upper 700s (a very few lenders will take a credit score of 660) and be ready to offer the lender a pile of documentation. And your loan will carry a significantly higher interest rate.

“Whenever I am dealing with a jumbo buyer, I simply prepare them by telling them they are going to have to be prepared to provide more information on their income and assets than they have probably ever been asked for before,” explains Dan Gjeldum, a Chicago-based vice president of National City Mortgage.

When the credit markets froze in 2008, the federal government put Fannie Mae and Freddie Mac into a conservatorship. The goal was to keep the secondary mortgage market functioning. But neither Fannie Mae nor Freddie Mac bought single family home mortgages for more than $417,000. (The conventional “conforming” loan limit has since been raised to $729,750 in a handful of designated “high cost” areas.)

Meanwhile, investors started taking a bath on their toxic jumbo mortgages. That killed any appetite lenders had for bigger home loans.

“Jumbo buyers were typically allowed to show little documentation – that is the complete opposite now. We, as an industry, actually ask jumbo borrowers for more information than some FHA buyers now – which doesn’t make any sense to consumers. But from a bank’s point of view, a bad $1 million loan is a lot worse than 10 bad $100,000 loans when you consider the amount of time it could potentially take to get that one loan off the books in the future,” says Gjeldum.

Is the market for jumbo mortgages thawing?

San Francisco-based mortgage broker Dick LePre, who works for RPM Mortgage, Inc., says the beginnings of a secondary market for jumbo loans could be forming, but it will be awhile before it develops.

If you need a jumbo loan now, your best bet is to go to a commercial bank, notes Fred Glick, a mortgage broker and real estate agent based in Philadelphia agrees.

Some of the banks are issuing a first mortgage for $417,000 and a second mortgage, or home equity loan, for whatever is needed above and beyond the first mortgage.

But don’t expect to get everything you want. “These second (mortgages) are harder to come by and I have only seen lenders go up to 85 percent (loan-to-value) in Pennsylvania and up to 75 percent (loan-to-value) in California. There are non-Fannie lenders that do have programs that usually go to 75 percent (loan-to-value) and some small banks, credit unions, and savings and loans may do something,” Glick says.

The key to finding a good jumbo mortgage is to work with a mortgage banker or broker that does a lot of them. Since there isn’t much, if any, of a secondary mortgage market for jumbo loans at the moment, you’re looking for a bank that will hold the loan in its portfolio.

Making It Easier to Apply For A Jumbo Mortgage Loan

If you want an easier ride when you apply for a jumbo loan, here’s what you can expect:

* Lenders want to see a credit score that’s well into the 700s. The lowest credit score accepted these days is in the upper 600s, but you’ll pay higher fees and a much higher interest rate, lenders say – and not every lender will do a jumbo mortgage for someone who has a 660 credit score.

* You’ll need a lot of skin in the game. With many lenders you’ll need at least 20 percent down in cash, with 6 months of cash reserves in the balance. The bigger your loan, the more cash you may need in reserves. Many lenders will ask for 25 percent down. But if you borrow more than $1 million, you might have to put down 30 percent, or more.

* Your interest rate could be 1.5 percent above conventional interest rates. If conventional borrowers are paying 5.5 percent on a 30-year, $417,000 loan, your interest rate could be 6.5 to 7 percent, lenders say. You’ll also have higher fees.

* Get your paperwork ready. Gjeldun says he has gone back to collecting the borrower’s last two pay stubs, statements from the last two months of all asset accounts, and the last two years of full federal and state income tax returns. “We can’t get away with limited documentation on jumbo loans anymore,” he says.

* Be prepared for several rounds of verifications. Not only will the lender call your employer and perhaps even your banker during the application process, but they may get a second call just before the closing to be sure you’re still employed.

* You may need to pay for two appraisals. Lenders will want to have a good read on the property’s actual value. For that, they may ask you to pay for two separate appraisals.

* You might have to consider an adjustable rate mortgage (ARM) rather than a fixed-rate mortgage. Interest rates on a 5/1 ARM will be lower than on the 30-year loan, but not by much. Meanwhile, you’re taking a risk that the interest rate will adjust up in five years.

It shouldn’t take longer to get a jumbo mortgage approved, lenders say. But you run into trouble if the property doesn’t appraise out in value.

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